Pound-Dollar Rate Week Ahead: Targeting 200-day Average Above 1.26 as Risk Appetite Recovers

- GBP/USD stil in consolidation mode but upside seen ahead.

- GBP/USD has scope to reach 200-day average up at 1.2660.

- Technical analyst tips GBP/USD failure at 1.2660, turn lower.

- But recovering risk appetite may spare GBP from new losses.

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- GBP/USD spot at time of writing: 1.2256
- Bank transfer rates (indicative): 1.1927-1.2013
- FX specialist rates (indicative): 1.2100-1.2150 >> More information

The Pound-Dollar rate handed back some of its earlier gains last week but is in a good position to recover lost ground in the coming days, with the 200-day moving average near 1.2660 said to be a possibility, although risk appetite will be key to the trajectory of the exchange rate this week. 

Sterling traded sideways in a narrow 150 point range against the Dollar through much of last week before a last minute buckling of the legs took the Pound-Dollar rate down through the 1.23 handle to close the week around 1.2256. That left the British currency sitting on a -1.58% loss for the week but in a good position to win back lost ground. The last minute buckling of the legs came as a result of a March non-farm payrolls report that showed coronavirus eating away at the job gains of recent years.

In just one single month the virus eliminated nearly all the new jobs created during the Trump presidency. This spooked investors and stoked demand for the safe-haven greenback late in European session although profit taking ahead of the New York close benefited the Pound-to-Dollar rate more than it did the Euro and some other currencies, which might indicate a greater concern among Dollar bulls about the prospect of a Sterling recovery than there are about a sudden comeback of others. 

The Pound-to-Dollar rate is still in consolidation mode and vulnerable to the downside, technical analysts say, although it did find support coming from its 21-day moving-average of prices on a closing basis last Friday and is said to have scope to reach its 200-day average up at 1.2660 over the coming days. 

Above: Pound-to-Dollar rate shown at hourly intervals, caught by 55-hour moving-average which is also the 21-day average. 

"GBP/USD continues to consolidate below the 61.8% retracement at 1.2516 and the 200 day ma at 1.2658. Currently the market is indicated to fail here, both on the daily chart and the intraday charts. Nearby support lies at 1.2194 and failure here should re-target the 1.1958 September 2019 low," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.  

Jones says that if the Pound-to-Dollar rate is able to overcome the 200-day moving average at 1.2658 upon the next challenge then it would subsequently have a chance to target the 1.3201-1.3210 levels that coincide with Sterling's peak against the Dollar for 2020. However, she's betting the British currency does not sustain any break above 1.2658 and favours a move down to a post-1985 low of 1.0463 over the next three weeks or so. 

Technical signals coming off the charts provide investors a good indication of the likely confines to price action over the coming days although it's investors' appetite for risk that will set the trajectory of the exchange rate. The Dollar has wiped the floor with every other currency in times of risk aversion and has been resilient against many others even when investors are in the upbeat mood that is often crucial for outperformance by Sterling and its riskier counterparts.

"For now it’s likely high beta FX will continue a slow grind higher, with the fall in ICU cases in Italy and Spain a potential forward-looking reason why markets would be “pulling forward the future outcome.” This is until the next wave of lockdown extensions and/or credit risks popping, which is just a matter of timing in our view," says Jordan Rochester, a strategist at Nomura. 

Above: Pound-to-Dollar rate shown at daily intervals, caught by 55-hour moving-average which is also the 21-day average. 

The Dollar strengthened on Friday when the true extent to which the coronavirus has eaten away at the labour market was revealed, although profit-taking saw the greenback pare gains ahead of the weekend and investors will have reason to cheer when they return to their desks this Monday there's a good chance that an improvement in risk appetite could further undermine the Dollar over the coming days. That would be good for the Pound-to-Dollar rate. 

"Distortions aside, though, the number of tests continues to rise, and the proportion of positive tests is beginning to fall," says Ian Shepherdson, chief economist at Pantheon Macroeconomics, referring to the number of new coronavirus cases confirmed in the U.S. "Case growth continues to slow in continental western Europe...Elsewhere, Spain, Germany, the Netherlands and Austria all reported the lowest daily increases since the crisis began."

The pace at which the coronavirus spreads is the most important driver of financial markets and exchange rates at present although some analysts expect that in the coming weeks the market focus will shift from the rate of spread to the pace at which so-called 'lockdowns' can lifted. There are a number of economic figures due out over the coming week although many relate to the pre-lockdown period and few will tell investors anything they don't already know. 

"The dollar is likely to maintain much of its strength over the short-term at least with no real clarity yet available for investors to shape expectations with more conviction," says Lee Hardman, a currency analyst at MUFG. "If COVID-19 is peaking, expect a greater focus on lockdowns being slowly reversed in the second half of April into May. That could set the scene for a USD reversal in June, into the end of Q2."

Above: Pound-Dollar rate shown at weekly intervals. Recovery halted near 61.8% Fibonacci retracement of 2020 downtrend.